Bulletin

Oil slides on speculation about Saudi’s pricing strategy

Crude at summer 2012 low after Saudis cut cost of oil to U.S. customers

Shutterstock/Fedor Selivanov

Oil prices continued to drop Tuesday after Saudi Arabia adjusted prices lower for U.S. customers

By

EricYep

Crude-oil prices extended losses Tuesday after falling sharply overnight, with the U.S. oil benchmark dropping to its lowest since June 2012.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in December
CLZ4, +2.08%
traded at $77.79 a barrel, down $1, or 1.3%, in the Globex electronic session. December Brent crude
UK:LCOZ4
on London’s ICE Futures exchange fell $1.10 to $83.67 a barrel.

Oil plummeted after Saudi Arabia, the world’s top crude exporter, adjusted prices for its December cargos. The oil producer lowered its price differentials for sales to the U.S. but raised the differentials for its Asian customers.

While the price adjustments were not as severe as the cuts for November, the lowering of prices for the U.S. market was interpreted by the market as stiffer competition against U.S. domestic crude production, traders said.

The pricing of Saudi Arabian and other Middle East oil producers for the U.S. market is based on the Argus Sour Crude Index, a basket of prices that’s much lower than Asia, where oil fetches a better price. So it makes more sense for oil producers to corner the Asian market where premiums are higher, traders said.

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Strength in the greenback on the back of stronger U.S. economic data is also weighing on commodities markets, including oil.

Later Tuesday, the American Petroleum Institute will publish initial data on U.S. oil inventory that’s expected to rise again, putting more pressure on oil prices.

“We still think there’s a little bit more to fall before we see a recovery,” Torbjorn Kjus, chief oil analyst at DNB Bank said at a presentation in Singapore. He said oil prices will struggle to recover to the $110 level seen earlier this year, and perhaps even to the $100/bbl level as fundamental factors are weaker than the prices suggest.

There is a deeper and longer drop in prices now than was seen in the price correction of 2012, and future prices suggest a much weaker physical market, Mr. Kjus said.

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